Disclaimer: This post is for informational purposes only and should not be taken as investment advice.
Most people have now heard of Bitcoin and other cryptocurrencies, but there is still a lot of confusion about the topic.
Investors may have seen Bitcoin’s meteoric rise and wondered how to get in on the action.
Technology enthusiasts may be interested in the underlying blockchain technology.
And precious metal investors may wonder if cryptocurrency could serve a similar purpose as gold in an investment portfolio.
Crypto is an immense topic to tackle, but this guide will start with the basics. What does the average person need to know about cryptocurrencies?
A cryptocurrency is a digital currency that exists only in a digital format.
Most cryptocurrencies are also decentralized, which means that they are not issued or regulated by any government or central authority.
Take Bitcoin, for example.
Bitcoin is a digital currency that is not backed up by any government or central authority. You cannot buy physical bitcoins, nor can you find paper bills that are issued in Bitcoin. It’s only available as a digital currency.
And Bitcoin is not issued by any government. Instead, it exists in its digital form, and transactions are processed by the blockchain.
These days, most crypto tokens are treated more as an asset class than they are a currency. Although investing in crypto has become more popular — data suggests that around 6% of US investors now own Bitcoin — crypto is not yet widely used to actually pay for goods and services.
This, too, is changing. In 2021, El Salvador became the first country to adopt Bitcoin as legal tender. And a handful of prominent companies and retailers now accept Bitcoin and other cryptocurrencies.
But if crypto is not backed by any government, what makes it valuable? And what stops someone from creating counterfeit crypto tokens?
Bitcoin is essentially a software, or a set of processes and protocols. It exists solely in its digital form.
Bitcoin is secured through cryptography, hence the name “cryptocurrency”. Cryptography ensures that Bitcoin is nearly impossible to duplicate, fake, or double-spend.
Bitcoin transactions are processed through a decentralized network of computers spread throughout the world.
Although it’s a bit older, this video from SciShow does a good job of explaining the concepts behind Bitcoin.
The technology that powers Bitcoin is known as blockchain technology, or simply “the blockchain”. When it comes to Bitcoin, the blockchain is essentially a ledger, or list, of all the transactions that take place on the network.
When a Bitcoin transaction occurs, “blocks” of information are added to the blockchain.
For instance, the blockchain might show that person A sent .004 Bitcoins to person B, and person X received 1.45 Bitcoins from person Z. These records are public, which means anyone can see them and verify their authenticity.
There is no central authority monitoring the transactions — instead, thousands of participants each monitor the network’s transactions and keep their own ledgers.
In this way, the blockchain is a decentralized ledger. Ledger records are made public, and thousands of market participants each keep their own ledgers, which reduces the risk of transaction errors and fraud.
The people and companies that maintain these ledgers are known as Bitcoin miners. Their high-tech computer nodes help maintain the blockchain ledger, and they are rewarded for their efforts with a chance at receiving free Bitcoin. See this guide to learn more about Bitcoin mining.
Keep in mind that not all cryptocurrencies use the same technology as Bitcoin — but most are based on similar underlying principles.
There are thousands of cryptocurrencies out there (an estimated 13,000 at the time of this writing!)
And cryptocurrencies are worth a lot. The total combined market capitalization for all known cryptocurrencies is around $2.6 trillion dollars at the time of this writing. That’s more than the market cap of Apple, the world’s most valuable company.
However, the vast majority of cryptocurrencies do not have widespread adoption, and many are practically useless. For beginners, it’s helpful to focus on the most popular cryptocurrencies.
The top 10 cryptos typically make up 80% or more of the total market cap of all cryptocurrencies.
Ranked by market capitalization (the total value), these are the top 10 cryptocurrencies as of late 2021:
For the most up-to-date list of the top 10 tokens (as well as live prices for each), check out CoinMarketCap.
That is a difficult question.
So far, many cryptocurrencies have been a fantastic investment. In 2017, one Bitcoin traded for around $1,000 USD. Today, it’s worth over $60,000 USD (although Bitcoin is so volatile, this price will surely be out of date by the time you read this!)
Of course, many cryptocurrencies have also failed miserably. OneCoin, for example, ended up being a Ponzi scheme that stole roughly $4 billion from investors. Other coins have had less dramatic endings, but have ended up being poor investments.
Moving forward — it’s anybody’s guess whether crypto will be a good investment.
It’s quite likely that cryptocurrency is here to stay. However, we don’t exactly know which cryptocurrencies will stick around, and which will be overtaken by rivals.
For instance, although Bitcoin is the most popular (and most valuable) coin, the technology behind it is fairly basic. Many in the crypto space believe that Bitcoin will eventually be displaced by a higher-tech coin — perhaps one that’s not even in the top 10 currently.
There are advantages and disadvantages to consider if you plan to invest in cryptocurrencies.
Note: There are many ways to buy cryptocurrency. Because this guide is focused on the basics, we’ll only discuss buying through centralized exchanges. Advanced users may use decentralized exchanges or other methods.
You can’t buy cryptocurrency through a normal brokerage account. Although, it’s worth noting that you can now buy a Bitcoin ETF that loosely tracks the price of Bitcoin (you don’t technically own the coins with this ETF, as it only buys Bitcoin futures).
The main way to buy Bitcoin, Ethereum or other cryptocurrencies is through a crypto exchange. These exchanges are similar to stock brokerages, except they focus on the crypto market instead of on stocks and mutual funds.
In the US, some of the most popular exchanges are:
The process for purchasing crypto on an exchange is relatively simple. You sign up for an account, transfer in money from your bank account, and then exchange US dollars for crypto.
You can buy fractional shares of crypto tokens — meaning that you don’t need to buy a whole Bitcoin or a whole Ethereum token. You can get started with a very small amount of money.
Each of these exchanges will have beginner guides on how to get started and buy cryptocurrencies on their platform. Each exchange will also have fees for buying or selling tokens.
You can also buy a limited number of cryptocurrencies on Robinhood, CashApp, Venmo, or PayPal. These are not true crypto exchanges, but if you just want to buy a small amount of a popular crypto like Bitcoin, these are an option.
Cryptocurrency is an interesting phenomenon, and this guide just scratches the surface of crypto knowledge. If you’re interested to learn more, there are many more in-depth resources on the internet.
Finally, we’ll reiterate that investing in cryptocurrency is very risky. Crypto can easily lose value, and it can happen fast. If you are not comfortable with taking extra risk, it may be best to avoid crypto.